Taking Stock

The new Supervalu era officially began on March 21. The organization is significantly lighter, no longer having to carry the burden of hundreds of unproductive supermarkets (half-sister firm AB Acquisitions now carries that load) and now possesses a much more enlightened management team to hopefully lead them back to the pre-2006 glory days. Supervalu’s debt load also has been significantly lessened and overall morale has improved with associates just knowing that the company is in the hands of experienced grocery professionals with proven track records.

That said, the outlook on Supervalu’s remaining businesses (independent wholesale, its five regional chains and Save-A-Lot) doesn’t give this reporter great hope that the company can move the needle forward significantly in the near term.

It is vital that Supervalu first create an infrastructure that will allow it to better compete in the future, and the Eden Prairie retailer/wholesaler has begun to do that with a debt restructuring and the whacking of 1,100 jobs (mainly at headquarters). It has revamped almost all of its senior management team with Janel Haugarth (president of independent wholesale) the most significant holdover and will scrap SuperFusion, one of the most poorly executed centralized merchandising programs in the history of the grocery business. In turn, the new organization plans to bring more focus to “Local” – pricing, merchandising, marketing/advertising and item mix.

It all sounds promising. However, this isn’t 1995 when the playing fields in all of Supervalu’s markets were not as crowed or diversely populated with so many alternate channel competitors. Let’s take a micro view of Supervalu’s business in the Mid-Atlantic.

Its two regional chains – Shoppers and Farm Fresh – have been slipping for the past four years, plagued by higher price perceptions, virtually no real estate cap-ex and declining morale in the stores. Those two regional retailers were once led by two of the best leaders in the business – Bill White at Shoppers and Ron Dennis at Farm Fresh.

Both have retired and were replaced by managers with different styles who didn’t command the respect of perform nearly at the levels of White or Dennis. Of course, whether it was Dick Bergman or Tim Lowe at Shoppers or Gaelo de la Fuente at Farm Fresh, continuing the excellent report cards of their predecessors would have been virtually impossible given the constraints and the ineptness of Supervalu’s flawed corporate management team and its centralized policies.

Now it’s Bob Bly’s (Shoppers) and Bill Parker’s (Farm Fresh) turn to change things. It’s not going to be easy, even with the increased flexibility that the new SVU is offering. From a market competition perspective in Balt-Wash, can Shoppers gain share in a very crowded field? Carving some sales from market leaders Giant/Landover and Safeway will be challenging enough, but with more Harris Teeters, Wegmans and Wal-Mart SuperCenters entering the fray (not to mention new Weis and PriceRite which have recently opened stores that go head-to-head with Shoppers’ locations), can Bly and his team change the view? A lot of toothpaste has been squeezed from the Shoppers tube over the past five years, and regaining its former strong price image will be very tough.

At Farm Fresh, Bill Parker certainly knows the drill. As an ex-Albertsons store executive and key confidante of Ron Dennis, he certainly understands the new culture and the challenges that lie ahead. And in one sense, he’s got an advantage over Bly, not just in local market experience, but in dealing with unique playing field that exists in the Tidewater region. That area of southeastern Virginia has always been fiercely competitive and, truthfully, hasn’t changed as much as other markets where Supervalu operates. In fact, with the weakening of market leader Food Lion (another retailer with major problems), there is a bit more breathing room for Parker and his team.

Conversely, Kroger is set to make a big expansion play in Tidewater, the entry of Whole Foods and the addition of more Harris Teeter stores (both prime competitors to high/low Farm Fresh), will also make market share gains challenging. Still, Parker’s biggest task will be to re-establish the type of discipline and execution (and ultimately respect) that the Virginia Beach based regional chain earned under Dennis. Once again, other than more local control, will SVU give Parker the tools (enough cap-ex money for store remodels and new units and enough local control of pricing and merchandising) to make a difference?

Although it’s still early, it was distressing to hear of some recent local layoffs at both Shoppers and Farm Fresh. Some of those jobs we’re told are repositionings and the fact that department merchandisers are being added back to the fold (the removal of which was one of many horrible decisions made under the Craig Herkert regime) is a good sign. However, working even leaner than the previous organization, which was already operating on a pretty thin level, will be another hurdle that Bly and Parker will have to overcome.

As for Supervalu’s independent business in the region, I’m amazed that eastern region president Kevin Kemp and his talented team have been able to maintain virtually all of Supervalu’s customers despite the corporate tumult that has existed for the past five years. Supervalu is the dominant wholesaler in the region and new CEO Sam Duncan has made preserving and building the company’s largest division a priority. However, over the past four months since the Supervalu/Cerberus deal was first announced, we’ve spoken to more than a dozen Supervalu independent customers and – while all of them are praiseworthy of the efforts of Kemp and his team – several were outspoken in noting that significant changes by the new management team will have to be made (private label, pricing, item mix) to keep them satisfied for the long term. That’s not to say that current Supervalu customers are close to leaving the company, but it’s clear that other wholesalers – including Bozzuto’s, C&S, AWI/White Rose and MDI – have all visited SVU supplied retailers and independents are poised to strike if given the nod.

While Save-A-Lot remains a solid contributor, the discount retailer’s sales and earnings have declined over the past two years, and in my opinion, the chain now offers the third best offering of that type (behind PriceRite and Aldi) in the Mid-Atlantic. That shouldn’t be surprising given that the company is now on its third president in less than two years. The scuttling of former top dog Bill Shaner in 2011 sent a huge negative ripple throughout the organization, and the lack of real estate expansion and cap-ex for corporate remodels coupled with Supervalu’s need to continually increase its inside margin all have contributed to the unit’s decline. In my mind, Save-A-Lot remains the top candidate to be sold down the road.

So, before we get too excited about the promise that may lie ahead for the new Supervalu, let’s not forget that the company is controlled by a private equity firm. The PE philosophy is a consistent one: maximize profit, operate as lean as possible, and ultimately flip the investment.

Cerberus has historically shown greater patience than most private equity firms, but the end game isn’t going to change. In the meantime, the new management team will have plenty of day-to-day heavy lifting to repair the many problems it inherited from the worst run publicly-traded grocery company of the past generation.